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Why the Market Gets Sustainable Investing Wrong

October 2019 
By Wendy Cromwell, CFA, of Wellington Management

We believe active investors have ample opportunities to generate return in this space by identifying and exploiting inefficiencies.

Wendy Cromwell, CFA
Director, Sustainable Investment and Portfolio Manager


Active managers, who seek to identify assets with the potential to beat or lag a benchmark, love market inefficiencies. When market participants lack, discount, or ignore relevant data, the resulting information gaps create asset mispricing that active managers may exploit to generate alpha for clients. We believe sustainable investing, including environmental, social, and governance (ESG) integration and engagement, impact investing, and other approaches (defined below), is a particularly inefficient market segment. This paper addresses several key inefficiencies and explains how we believe investors can take advantage of them: 

1. The market’s focus on short-term growth
2. Inconsistent, backward-looking ESG ratings
3. Emerging-market (EM) indices’ underexposure to structural development
4. Blind spots in climate risk analysis
5. An undefined impact-investing universe

Important Risks: Investing involves risk, including the possible loss of principal. • Risks of focusing on investments that involve sustainability and environmentally responsible investment criteria may influence investment performance relative to a fund’s benchmark or competing funds and expose a fund to increased risks related to downturns or other adverse developments in that market segment. • Foreign investments may be more volatile and less liquid than U.S. investments and are subject to the risk of currency fluctuations and adverse political and economic developments. 

WP506 214141